Characteristics of Firms Reporting Consistency Exceptions--A Cross-Sectional Analysis.

Abstract This paper reports the results of an empirical investigation of whether firms making accounting changes differ significantly from firms not making accounting changes. The paper relates directly to a study conducted by Gosman 1973 and to critical comments based upon that study Cushing and Deakin, 1974. The research methodology focused upon differences between firms which reported accounting changes vis-a-vis an auditor's consistency exception and those firms reporting no changes. The experimental sample was based upon 10-K reports filed with the SEC between 1 January and 30 April 1973. From this population, 1,543 firms were selected randomly and dichotomized as changers and nonchangers. Analysis of variance (ANOVA) was utilized in examining for significant differences among three firm characteristics--size, auditor and industry. Three additional variables were incorporated into the analysis as potentially confounding variablest--(1) fiscal year, (2) existence of extraordinary items and (3) direction of earnings. An important contribution of the utilization of the ANOVA procedure was testing for interactions among variables. The results suggest that size, industry and the reporting of an extraordinary item on its financial statements are associated with the likelihood that a firm will report an accounting change.